Executive Summary / Key Takeaways

• Advanced Drainage Systems (WMS) is a leading provider of innovative water management solutions, strategically transforming from a pipe manufacturer to a diversified solutions leader across stormwater, residential, and infrastructure markets.
• The company leverages proprietary thermoplastic technology offering quantifiable benefits like faster installation, reduced costs, and smaller footprints compared to traditional materials, supported by significant investments in R&D and recycling operations.
• Despite near-term market choppiness, particularly in non-residential construction and agriculture, WMS has demonstrated financial resilience, maintaining strong profitability and generating robust cash flow, enabling continued strategic investments and shareholder returns.
• Secular tailwinds from aging water infrastructure and increasing extreme weather events are driving long-term demand for WMS's solutions, highlighted by significant projected funding needs in stormwater and decentralized wastewater management.
• WMS is positioned for above-market growth through material conversion, focus on higher-margin segments like Infiltrator and Allied Products, and opportunistic M&A, supported by a strong balance sheet and disciplined capital allocation.

Building Resilience in Water Management

Advanced Drainage Systems, Inc. (WMS) stands as a prominent force in the critical sector of water management, providing innovative solutions across the stormwater and onsite septic wastewater industries. The company's business model is centered on managing the lifecycle of a raindrop, offering products for capture, conveyance, storage, and treatment. This comprehensive approach serves a broad range of end markets, including residential, non-residential, infrastructure, and agriculture. Over the past decade, WMS has strategically evolved from primarily a pipe manufacturing company into a diversified water management solutions provider. This transformation has focused on expanding its product portfolio, deepening its presence in key geographies, and increasing exposure to higher-margin segments like Allied Products and Infiltrator.

The industry landscape WMS operates within is characterized by significant scale and fragmentation. The stormwater industry alone is estimated to be an approximately $13 billion annual market, while the onsite septic market adds roughly another $2 billion, with about 30% of new North American single-family homes utilizing septic systems. This creates a combined addressable market opportunity of approximately $15 billion for WMS. Within this vast market, WMS holds leading positions, particularly in the plastic pipe segment of the stormwater market, where plastic pipe represents about 40% of the estimated $5.5 billion opportunity. In Allied Products and the onsite wastewater market, WMS and its Infiltrator segment hold estimated shares of around 10% and one-third, respectively. Competition is robust, encompassing producers of traditional materials like concrete, steel, and PVC, as well as numerous smaller specialty and regional thermoplastic pipe and drainage solution providers. WMS differentiates itself through its national footprint, extensive sales and engineering support, broad product line, and manufacturing scale, positioning it as the only corrugated HDPE pipe producer with a national reach, while many competitors operate regionally.

A core element of WMS's competitive advantage lies in its differentiated thermoplastic technology and continuous innovation. The company's high-performance corrugated pipe, made from HDPE and PP resins, offers tangible benefits over traditional materials. These include ease of installation, lighter weight, superior durability, and resistance to corrosion and abrasion. Products like HP Storm and SaniTite HP, utilizing polypropylene, provide increased pipe stiffness, higher environmental stress crack resistance, and improved thermal properties, leading to a reduced need for select backfill and expanding application ranges, including surpassing stiffness requirements for sanitary sewer applications. Infiltrator's plastic leachfield chambers and tanks offer a smaller footprint, are easier to transport, and require less time and energy to install compared to traditional concrete systems, driving cost and time savings on the job site. Allied Products like StormTech chambers and Nyloplast structures enable efficient stormwater storage and improved ease of installation, reducing overall project costs and timelines. The company's investment in its $65 million, 110,000 sq ft Engineering and Technology Center, opened in October 2024, underscores its commitment to innovation. This facility is designed to accelerate new product development, enhance material science (including opening new streams of recycled plastic), and improve manufacturing processes. For example, the center's 90,000-gallon hydraulics laboratory allows for rapid testing and commercialization of new products like the EcoStream biofiltration system. WMS is also one of the largest domestic recyclers of HDPE and PP, converting over 0.5 billion pounds of recycled material annually, contributing to sustainability goals and providing a cost-effective raw material source. These technological and operational advantages contribute significantly to WMS's competitive moat, enabling it to capture market share through material conversion and support its profitability.

WMS's strategic evolution is clearly reflected in its recent financial performance and segment contributions. In fiscal year 2025, the company reported net sales of $2.90 billion, a 1% increase over the prior year, driven by a 3% increase in domestic construction market sales. This above-market performance highlights the success of its material conversion strategy. The Infiltrator segment was a key growth driver, with external revenue increasing 15.0% to $516.3 million in FY2025, including contributions from the Orenco acquisition. Organically, Infiltrator grew 5%, propelled by double-digit growth in tanks and advanced treatment products. The Allied Products Other segment also saw revenue growth, increasing 2.5% to $689.9 million, driven by demand. The Pipe segment, while still the largest contributor with $1.50 billion in external revenue, experienced a 2.6% decrease in FY2025, primarily due to unfavorable price mix partially offset by higher demand. International sales decreased 6.3% to $194.6 million, impacted by price mix and foreign currency rates. This shift in revenue mix towards higher-margin segments like Infiltrator and Allied Products has contributed to the company's profitability resilience.

Operationally, WMS leverages an extensive network of 63 manufacturing plants and 39 distribution centers across North America and internationally. This scale, combined with proprietary production equipment and a dedicated fleet of approximately 600 tractors and 1,100 specially designed trailers, provides critical cost advantages and enables superior customer service, including striving for less than three-day lead-times on deliveries. Investments in automation and efficiency, such as those at the Infiltrator manufacturing facility which have improved profitability by 1,100 basis points since 2020, continue to enhance the company's operational performance. The recent acquisition of River Valley Pipe in May 2025 aims to strengthen the company's footprint and market share in the Midwest agricultural market, while the consolidation of a pipe plant and distribution yards is intended to optimize the network further.

Financially, WMS has demonstrated resilience and strong cash flow generation. In fiscal year 2025, the company achieved an Adjusted EBITDA margin of 30.6%, marking its second most profitable year despite facing headwinds.

Cash provided by operating activities totaled $581.5 million in FY2025.

The company maintains a strong balance sheet, ending FY2025 with $1.1 billion in liquidity and a net leverage ratio of 1.1 times. This financial strength supports its disciplined capital allocation strategy, prioritizing strategic investments in the core business (with planned CapEx of approximately $275 million in FY2026 focused on growth and productivity), opportunistic M&A (like the Orenco acquisition), and returning capital to shareholders. The company returned $121 million to shareholders in FY2025 through dividends and share repurchases and recently announced a 13% increase in its annual dividend.

Looking ahead, WMS's outlook for fiscal year 2026 reflects a cautious stance on end markets, projecting overall revenue between $2.825 billion and $2.975 billion and Adjusted EBITDA between $850 million and $910 million, resulting in a margin range of 30.1% to 30.6%. This guidance anticipates non-residential and residential markets to be flat to down low/mid-single digits due to interest rates and uncertainty, while infrastructure is expected to grow low single digits, benefiting from IIJA funding. Agriculture and International markets are projected to be down double digits. Key assumptions include low single-digit volume growth (implying continued above-market performance), low single-digit pricing decline (partially due to lapping), neutral price/cost dynamics (lower material costs offsetting pricing), unfavorable manufacturing costs (due to absorption impact), and favorable transportation costs. Despite the challenging market backdrop, management is confident in achieving above-market growth through conversion and maintaining attractive profitability.

WMS faces several risks, including sensitivity to economic cycles, fluctuations in raw material prices (HDPE and PP resins), intense competition, potential difficulties integrating acquisitions, and the impact of weather events. The company's reliance on a few significant customers (top ten accounted for 47% of FY2025 net sales) also presents a concentration risk. However, the company's strategic focus on diversification, operational efficiency, and technological innovation are designed to mitigate these risks and capitalize on long-term opportunities.

The secular tailwinds driving demand for WMS's solutions are compelling. Aging water infrastructure across the U.S., highlighted by the ASCE's D grade, necessitates significant investment. The EPA's 2022 survey estimated $115 billion needed for stormwater management and $75 billion for decentralized wastewater over the next 20 years, representing substantial increases driven by changing regulatory requirements, increasing extreme weather events, and growing impervious surfaces. The increasing frequency and intensity of large-scale storm events, exemplified by hurricanes in Texas leading to significantly increased retention requirements, underscore the urgent need for more resilient water management solutions that WMS's products provide.

Conclusion

Advanced Drainage Systems has successfully transformed into a diversified leader in water management solutions, leveraging its proprietary thermoplastic technology, extensive operational network, and strategic investments to capture market share and maintain strong profitability. While facing near-term headwinds from choppy end markets and material cost pressures, the company's financial resilience, robust cash flow generation, and strong balance sheet provide the flexibility to continue investing in growth initiatives, including innovation, recycling capacity, and strategic acquisitions like Orenco. The long-term investment thesis is underpinned by powerful secular tailwinds stemming from the critical need to upgrade aging water infrastructure and build resilience against increasing extreme weather events. WMS's competitive advantages, rooted in its scale, technology, and comprehensive value proposition, position it favorably to capitalize on these opportunities and continue its trajectory of above-market growth and value creation for shareholders. Investors should monitor the pace of recovery in non-residential markets, the execution of integration and synergy programs from recent acquisitions, and the company's ability to manage raw material costs and maintain pricing discipline in a competitive environment.